LIQUIDATION
Liquidation refers to the process of winding up a company's affairs and selling its assets to pay off its debts. This typically happens when a company is insolvent, meaning it cannot meet its financial obligations.
An independent liquidator who is a Licensed Insolvency Practitioner is appointed by either the Court, or the Company's shareholders to:
Investigate the company's financial affairs.
Identify and recover the company's assets.
Sell the company's assets.
Ensure the company's creditors were treated equally prior to the liquidation.
Ensure the requirements of the Companies Act 1993 were met prior to the liquidation.
Pay off the company's debts to the extent possible in accordance with the Companies Act 1993.
Distribute any remaining funds to the company's shareholders.
Liquidators take control of the company upon their appointment and deal directly with company employees and creditors and can take the pressure and stress away from company directors in dealing with an insolvent company.
RECEIVERSHIP
Receivership typically involves protecting the interests of secured creditors (those with a security interest in the company's assets) by:
Collecting and selling assets: The receiver (a Licensed Insolvency Practitioner) identifies and sells the company's assets under their control to repay debts owed to secured creditors.
Preserving assets: The receiver takes steps to prevent further deterioration of the company's value while the situation is resolved.
Negotiating with creditors: The receiver communicates with all creditors and stakeholders to find the best solution for everyone involved.
There are two main types of receivership in New Zealand:
Private receivership: This is the most common type, initiated by a secured creditor when a company defaults on its loan. In this case, the creditor uses their security interest in the company's assets to appoint a receiver.
Court-appointed receivership: This is less common and occurs when a court orders the appointment of a receiver, usually due to concerns about the company's solvency or misconduct.
VOLUNTARY ADMINISTRATION
New Zealand's voluntary administration (VA) regime is a formal insolvency procedure designed to rescue financially troubled companies by providing an opportunity for rehabilitation rather than immediate liquidation. Here's a summary:
Initiated by the company's directors: Unlike liquidation, which can be initiated by creditors, VA gives the company some control over its fate.
Appointed administrator: A Licensed Insolvency Practitioner takes over control of the company to assess its viability and develop a restructuring plan.
It can prevent creditors from taking action, such as Court proceedings, enforcing securities and taking possession of property, or making demands under a personal guarantee while the Administration is in progress.
Goals: The goal is to find a way for the company to become solvent again and continue operating, while protecting the interests of creditors as much as possible.
Benefits:
Avoids immediate liquidation: VA offers a chance to save the company and jobs.
Flexibility: Allows for various restructuring options tailored to the specific situation.
Creditor involvement: Provides a platform for negotiation and compromise.
Challenges:
Underutilised: Research suggests that the VA process may be underused, potentially due to lack of awareness or understanding among directors.
Effectiveness: Studies indicate mixed results in terms of successful company rehabilitation.
COMPROMISES
Creditor compromises can either be formal (under Part 14 of the Companies Act 1993), or informal between the Company and it's creditors.
Essentially a Compromise is an agreement between the Company and it's creditors to restructure its debts and potentially avoid harsher insolvency options like liquidation or receivership.
Process:
The company proposes a compromise, which could involve:
Reduced debt payments: Creditors agree to accept a portion of what they're owed.
Extended repayment: Debts are repaid over a longer period than originally agreed.
Alternative arrangements: Using assets not readily available in liquidation to partially satisfy debts.
For a formal compromise, Creditors vote on the proposal at a formal meeting or by postal vote and approval requires at least:
50% of creditors by number and
75% of creditors by value within each creditor class.
If approved, the compromise binds all creditors who received notice, even those who voted against it.
Once payments are complete under the compromise, any remaining debt is written off by creditors.